Netscape taken down a peg, 4/20/98

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Netscape taken down a peg
High-flying browser pioneer meets its match in Microsoft.

By Todd Wallack
Network World, 4/20/98

Just two years ago, no company was hotter than Netscape Communications Corp.

The original Internet company had a lock onbrowsers, and it looked as if Netscape could become the next Microsoft Corp.

Indeed, when the company went public in August 1995, demand for the stock was so strong that underwriters doubled the initial public offering price to $28 and still wound up doling out the stock to a favored few. Not bad for a 16-month-old company that had never earned a profit and had only a trickle of revenue. But by late 1996, Microsoft and other rivals had embraced the Internet, and Netscape's monopoly started to fade.

Today, the company is losing money, coming off recent layoffs and struggling to defend its market. "Netscape absolutely ran into a wall,'' says industry analyst Tim Sloane, of Aberdeen Group, Inc., in Boston. "I don't believe their success demands that they [be] acquired . . . but they need to redirect their strategy.''

In a nutshell, Sloane says, Netscape's problem is that it can't make money selling desktop clients and is beginning to have trouble at the enterprise level now that larger, stodgier computer companies have Internet offerings of their own.

"People don't perceive Netscape as an enterprise company,'' he says. To survive, Netscape must transform its image, merge with an enterprise company or strengthen its partnerships with more successful enterprise players, Sloane says.

The most obvious problems have been with Netscape's browser business. But Microsoft's doubly damaging decision to give away its browser and bundle it with its operating system has worn down Netscape's lead. Experts say Netscape has roughly 60% of the browser market. Microsoft owns nearly all of the rest.

But Netscape has taken four initiatives to maintain its dwindling lead:

Giving away its browser.

Making its source code available. In a surprising move, Netscape has released the underlying code for its browser so independent programmers can modify it and add new features.

Selling a stand-alone browser. Netscape originally tried to use its massive browser base as a launching pad for its groupware/e-mail suite, which a user had to install to get Navigator. But when companies such as Lotus Development Corp. balked at distributing the rival suite, Netscape agreed to separate the browser.

Battling bundling. Netscape helped spark the U.S. Department of Justice's investigation into Microsoft's bundling practices and has already won a small victory. A judge has temporarily barred Microsoft from preventing PC makers from removing its Internet Explorer browser and shipping Netscape with new computers instead.

Despite the dwindling revenue stream, Netscape's browser business will continue to be important because it is key to fueling the company's other segments, particularly its Web business.

With 68 million Netscape users - 40% of whom have left www.netscape.com as their default home page - the company boasts one of the busiest sites on the World Wide Web. RelevantKnowledge, Inc. and Media Metrix, Inc. rank it in the top three most visited sites on the 'Net, and Netscape has tried to turn the site into a free online service offering a full range of news and other content.

But Jim Nail, of Forrester Research, Inc., a research firm in Cambridge, Mass., says Netscape could have trouble maintaining its traffic as more sophisticated consumers and corporations learn to reset the default home pages. "They don't have a natural audience,'' he says. "They have an accidental audience.''

Web revenue last year accounted for about 17% of Netscape's sales, or $93 million. Much of it came from search engines, which forked over big bucks to link their sites to Netscape's. But after steady growth, analysts say the business was flat for the second half of last year. Netscape blamed an accounting change, in which it decided to spread out payments for key partnerships instead of taking an upfront, lump sum amount.

Despite Navigator's high profile, Netscape reaps three-quarters of its revenue from its enterprise server and services businesses, which encompass Web servers, messaging, electronic commerce tools and other programs. The SuiteSpot server suite is its main revenue generator.

But the unit has grown more slowly than Netscape would like and while Netscape did not detail the unit's finances, it did say the unit stumbled badly in the fourth quarter of 1997. Jason Dessel, a client/server specialist at Universal Studios, Inc., in Universal City, Calif., says Microsoft had a big advantage in winning his company's business.

Although many staffers personally preferred Netscape's products, he points out that Micro-soft's Internet Information Server comes with Windows NT, plus it is highly integrated with Microsoft's messaging system and other products. "Everything's built in,'' Dessel says.

None of this is meant to imply that Netscape is on the verge of going under. NationsBanc Montgomery Securities, Inc. analyst Greg Vogel thinks the company will turn a profit again in the second quarter. But eventually, Vogel thinks Netscape will have to merge with a larger enterprise company.

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